Posted by Larry in Iowa on April 07, 2003 at 15:32:04:
Heavens to Betsy! You are missing a golden opportunity. Pay your son! Find some simple maintenance tasks that he can do and pay him for them. Let him spend that money.
You provide incentive and education at the same time.
Lots of equity!! What to do with it??!! - Posted by Tim (CT)
Posted by Tim (CT) on April 07, 2003 at 09:30:23:
O.K. Here?s my dilemma:
Almost 2 years ago, I purchased a 3-family multi-unit for 120k. Since then, it?s been doing very well. I?m getting just about $1,100/mo poc. I?ve put about 10k into it in fixes and cosmetic repairs and I?ve probably got at least another 5k to go to get it to where I want it. It?s an old house (1920) so I?m sure I?ll be continuously putting some fixes in. They?re all 3 bedrooms so I don?t have too much vacancy. And, when I do, it?s not for lack of interest. I needed to keep people out to rehab it.
Anyway, I asked a (very good) realtor friend of mine what he thought the market value was on it. To my astonishment, he came back with about 185k!! So, I?ve got a lot of equity in it. The thought is that this house is going to be for my son?s college education (he has 10 years before that time). I?m toying with the idea of putting the house on the market, taking the profit and trying to pick up 2, 3 or 4 more houses (depending on what I need to put down for them). I have two younger daughters that I want to do the same thing with.
Now, in my area, prices are out of control. I thought this house was going to come back at about 150k or so. I really don?t want to lose this equity if I can help it. If I can roll it over into a few houses and get the same kind of poc, I think my return, when I go and grab the equity, will be even greater just because I?ve got more principle that?s been knocked down. Now, if I sit on this house, and go and pull it out when my son is ready for college, who knows what the house will be worth. The previous owner bought the house in 1987 for 178k. I bought it from him in 2001 for 120k. He lost his equity. I don?t want to. I want to use it before I lose it. Now, I realize that this is assuming that the house will sell for 185k (give or take 10k) or so. My other thought is to try and sell it on a lease/option to another investor. At least, this way I can lock in a future price (2 years or so down the road) in the 190?s. I?m just trying to kick around some ideas. What would others do?
I will say that one of the downsides to cashing out now is that I’ve got a pre-payment penalty of 5% for the first 3 years. I’m almost 2 years into it. So, I’ll probably end up paying about 5,300 or so. But, If I can get a good price, I might just go ahead and sell anyway.
Any thoughts on this would be appreciated.
Re: Lots of equity!! What to do with it??!! - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on April 08, 2003 at 24:47:54:
Tim–(CT)---------------
Yes, I understand that CT had a great drop in values a few years ago and a big runup recently.
Think about what you want the most of: C A or T–as in CAT in my post “beginners success.” Cash flow? Appreciation? Tax benefits? You will find that these three economic benefits of real estate investing tend to be antagonistic with each other. So you decide which onc you want to maximize and buy properties that do that. You will inevidibly push one of them down, and probably the third will be medium.
For instance, I have properties in CA for appreciation and tax benefits–very little cash flow. I buy properties on the tax resales in OK and hold for cash flow. I get very little tax benefit and a decent appreciation–forced appreciation–from buying below market value. As far as natural appreication goes, I don’t expect much. Maybe the properties will match the lowered purchasing power of the dollar.
Think about what you are after. Where you can get more of that. What types of properties will give you that.
I’d suggest studying up on how to buy properties at bargain prices.
Good InvestingRon Starr*****
Re: Lots of equity - Posted by ken in sc
Posted by ken in sc on April 07, 2003 at 13:29:21:
Another way you could use this equity is to exchange to more than one new property. Using section 1031 IRS code, you would pay no taxes. Lets look at your numbers:
You have probably $70,000 in equity. Using section 1031 you could buy up to three properties using proceeds from the sale of your property and pay no taxes. That would be 20K+ down on three properties. The trick is to find 3 new properties that you can buy below market (say buy a 100K house for 80K), then you get that equity as well. You could wind up with not 70K in equity, but maybe 100-120K in equity with a little work.
I did this several times during the growth stage of my portfolio. Sell, exchange into 2 or 3, making a good deal with each new purchase and making sure each transaction follows section 1031 so as to not pay any taxes. John Schaub has an excellent tape course on this which goes into great detail and gives you paperwork.
This may not work for you but I thought I would include it as an option.
Ken
Re: Lots of equity!! What to do with it??!! - Posted by GL - ON
Posted by GL - ON on April 07, 2003 at 12:06:50:
$185,000 is nothing. You shouldn’t sell until the price is a multiple of your purchase price. Do you think it won’t? It will if you wait long enough. And if it’s a good building with positive cash flow why wouldn’t you keep it a long time?
Here is how you know it is time to sell: There is a boom on, that has been going on for several years, and new investors are paying ridiculous prices. I mean deep in negative cash flow territory.
Do you know what GRM means? If not do an archive search, it has been covered before. At the peak of the last boom in Toronto 1989, apartment houses were selling at a GRM of 16 and higher. I’m guessing you have a GRM around 4. So we are talking about a price of around $500,000 in a boom, not counting any appreciation due to rent increases.
The reason I say this is, that if you like apartment investing, selling one to buy two or three others is a poor way to do it. It means taking two steps forward and one step back. Keep what you have and buy more.
You can use your equity in different ways. One way is to give a seller a mortgage on your property as a down payment. This gets around the problem of banks not wanting you to finance out when you buy. Or use your equity to increase the 1st mortgage, or get a line of credit.
As long as you can buy good rentals with positive cash flow, go for it. You won’t lose. When the market goes nuts and newbies are offering ridiculous prices, that is the time to sell out and take your profit.
Now about getting your children involved, you could try getting them to associate your buildings with money. When they are small you could let them sweep the steps and the hall, and give them a dollar. Put them to work and pay them. As they get older you can let them clean, paint etc. and pay them the going rate.
Whenever they want some dough, they will ask you if you have any work for them (if you do it right).
Eventually they will be mature enough that you can let them in on the secret: the money you pay them is chump change, the real dough is in owning real estate.
They may be able to grasp this when they are in their teens (I was). On the other hand I know some people who still don’t get it when they are in their forties.
Re: Lots of equity!! What to do with it??!! - Posted by wpage
Posted by wpage on April 07, 2003 at 11:19:38:
Tim (ct) My personal opinion would be to hold this property and do nothing with it. Keep paying down the mortgage without any refinancing. Since the market in your area is appreciating at a fast pace selling the property at a high price then buying back at a high price makes no sense. Think about it? You would have costs of selling: including penalty for pre-pay, marketing costs (maybe a commission), costs of re-buying, costs of starting over renovations on the next property, income taxes to consider, etc.
What I would do would be to get creative with the $1100. cash flow. Try to find another property that you could l/0 or buy from an owner that doesn’t need the money right now. Offer to pay your down payment at the rate of $1000. per month for X number of months from your poc. Once you have given a certain amount of down payment you could mortgage the property, then start the process over again. By doing this you get to keep your equity and use it at the same time. Just my thoughts. good luck wpage
Re: Lots of equity!! What to do with it??!! - Posted by IB (NJ)
Posted by IB (NJ) on April 07, 2003 at 11:03:20:
Your market sounds alot like mine (NJ). Our 3 bedroom 3 families are worth on average $185k as well. If it was me I’d do one of two things:
1)Take an equity line of credit against it and use it for quick flips.
I definitely wouldn’t sell as multi units should see a nice appreciation for the next ten years (depending on your loaction). The line of credit would give me the flexibility of using the equity when I saw fit. The interest on the credit line is also tax deductible as opposed to taxable income from selling it.
I would also teach my son the basic upkeep of the property. Since he’s about 7-8 years old, this would be confined to small stuff like sweeping the front of the house, etc. But as he gets older I would teach him to manage the finances of the building. By the time he got into college he would manage the finances of all 3 rentals. I remember that Donald Trump’s Father started him off in this manner.
Re: Lots of equity!! What to do with it??!! - Posted by matt
Posted by matt on April 07, 2003 at 10:12:23:
I’m no expert, but I’d hang in there until you lose the penalty. If you’re getting pos. cashflow anyway, throw excess into a college 529 plan or simple money market (if you want to reinvest in RE)and sell in over a year. Sounds like you’ve got a decent place and 12k a year for another year or two will give you a good start for either college or another fixer upper.
Now if you’ve got two - three “hot” deals staring you in the face,that generate @ least the same or better cashflow, it makes sense to consider.
Re: Lots of equity - Posted by Tim (CT)
Posted by Tim (CT) on April 07, 2003 at 13:38:13:
This is exactly what I was thinking of. Use the 1031 exchange (I think that’s what you’re referring to) to turn 1 property into a few. I’m getting the feeling from others that this is not the best way to use this equity. I guess it all comes down to what other types of deals I can find and how good those deals are.
Thanks for your input.
Re: Lots of equity!! What to do with it??!! - Posted by Brian
Posted by Brian on April 08, 2003 at 13:44:24:
I can’t find GRM in the archives. Can anyone help?
many thanks,
Brian
Re: Lots of equity!! What to do with it??!! - Posted by Tim (CT)
Posted by Tim (CT) on April 07, 2003 at 12:28:16:
Thanks for the advice. Based on what everyone’s telling me, I think I’m getting the picture on what to do with this equity. I don’t want to cut my earnings on this property too soon just to take out a few thousand. I’d rather wait and be able to take out 100k if the market goes well. I’ll certainly check out the LOC scenario with regards to buying other properties. This might make the best sense.
P.s. I like your ideas about the kids doing some work at the properties. I think after a while, they will see this property as an income producer. Not just a place to work to get a couple of dollars. It seems pretty similar to what I read about in Rich Dad, Poor Dad.
Thanks again.
Re: Lots of equity!! What to do with it??!! - Posted by Tim (CT)
Posted by Tim (CT) on April 07, 2003 at 11:10:57:
Thanks for the reply. Right now, my son hates these rentals. I can understand. When I have to do something over there and moms not around, I have to drag him over. Hopefully, that will change as he gets older and starts to understand why I’m doing this stuff. One of my other thoughts is to teach him this type of business so when he is in college (or, just out of college), he can maintain it with me watching/overseeing from the side. I wish my father gave me a property like this when I was 18!! I keep explaining to him that this property will pay for a good portion of his college. He’s starting to understand but he is only 8.
As far as the rehabs go, I’m not into that only because I don’t have the time. Certainly, no time for doing the work myself but even for subbing the work out. Maybe someday. I do like the LOC option.
Thanks for the thoughts.
Re: Lots of equity!! What to do with it??!! - Posted by IB (NJ)
Posted by IB (NJ) on April 07, 2003 at 15:58:10:
I like Larry’s suggestion. Also, to get him interested why not have him work side by side with you now? You and he can BOTH sweep the sidewalk. Got a home office? Get him a desk too and he can help you with the paperwork (give him something small to handle like stamping envelopes). Do you ever have meetings where he can tag along?
My Brother and I are partners in our company. Every now and then, his 7 year old son (I don’t have kids) will sit in on the meetings just to be in the room with the guys. But I remember one meeting 3 years ago when he happened to be sitting on his father’s lap. His Dad was talking about buying another piece of investment property he saw earlier when his son spoke up (from playing with his toys) “so we can fix it and sell it, right?”. The kid caught on at 4 years old. Start em young…